Studied by 2 peopleEconomics (basic)
The science of scarcity, the study of choices (with using resources.)
Scarcity
we have unlimited wants but limited resources. since we are unable to have everything we desire, we must make choices on how we will use our resources.
Economics (textbook definition)
Social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants. Study of how individuals and societies deal with scarcity.
Microeconomics
Study of small economic units such as individuals, firms, and markets (ex: supply and demand in specific industries, labor markets)
Macroeconomics
Study of large economy as a whole or economic aggregates (ex: economic growth, government spending, inflation, unemployment)
How is economics used?
theoretical economics and policy economics
Theoretical economics
Economists use the scientific method to make generalizations and abstractions to develop theories
Policy economics
Theories (theoretical economics) are applied to fix problems or meet economic goals
Positive statements
Based on facts, avoids value judgments (what is)
Normative statements
Includes value judgments (what ought to be)
1st key economic assumption
Society has unlimited wants and limited resources (scarcity)
2nd key economic assumption
Due to scarcity, choices must be made. Every choice has a cost (trade-off)
3rd key economic assumption
Everyone's goal is to make choices that maximize their satisfaction. Everyone acts in their own "self-interest"
4th key economic assumption
Everyone makes decisions by comparing the marginal costs and marginal benefits or every choice
5th key economic assumption
Real-life situations can be explained and analyzed through simplified models and graphs
marginal analysis
making decisions based on increments (thinking on the margin)
You will continue to do something as long as the marginal benefit is ___________ than the marginal cost
greater
trade-offs
ALL the alternatives that we give up when we make a choice
Opportunity cost
most desirable alternative given up when you make a choice
Utility
satisfaction
Marginal
additional
Allocate
distribute
Price
Amount buyer (or consumer) pays
Cost
Amount a seller pays to produce a good
Investment
the money spent by BUSINESSES to improve their production
Consumer goods
created for direct consumption (ex: pizza)
Capital goods
created for indirect consumption (ex: oven)
Factors of production
Land, labor, capital, entrepreneurship
Land
All human resources that are used to produce goods and services
Labor
Any effort a person devotes to a task for which that person is paid
Capital types
Physical and human
Physical capital
any human-made resource that is used to create other goods and services
Human capital
any skills or knowledge gained by a worker through education or experience
Entrepreneurship
ambitious leaders that combine the other factors of production to create goods and services
What do entrepreneurs do?
Take the initiative, innovate, and act as risk bearers to obtain profit
Profit
Revenue - costs
Productivity
A measure of efficiency that shows the number of outputs per unit of input (allows more production with fewer resources) (ex: 10 pizzas / hour)
Why do businesses and countries want to improve their productivity?
Since all resources are scarce, improving productivity allows us to produce more stuff with fewer resources.
Production Possibilities Curve/Frontier (PPC)
A model that shows alternative ways that an economy can use its scarce resources.
What does the PPC demonstrate?
scarcity, trade-offs, opportunity costs, and efficiency
Four Key Assumptions (PPC)
Only two goods can be produced, full employment of resources, fixed resources, fixed technology
Ceteris Paribus
Fixed resources. "All other things held constant"
Production Possibilities Table
Each point represents a specific combination of goods that can be produced given full employment of resources. Can be plotted as a PPC.
Efficient resources are....
on the line (Points A, B, C)
Inefficient resources/unemployment are...
below the line (Point D)
Impossible/unattainable given current resources are...
above the line (Point E)
Opportunity Cost using a PPC
If you're going down letters, use the y axis. If you're going up letters, use the x axis. Whatever the difference is, that is opportunity cost.
Constant Opportunity Cost
Resources are easily adaptable for producing either good. Result is a straight line PPC (not common)
Law of Increasing Opportunity Cost
As you produce more of any good, the opportunity cost (forgone production of another good) will increase. Result is a bowed out (concave) PPC
Why is the law of increasing opportunity cost true?
resources are NOT easily adaptable to producing both goods.
3 Shifters of the PPC
Change in resource quantity or quality, Change in technology, Change in trade
Capital goods and future growth
Countries that produce more capital goods will have more growth in the future
Does a change in demand shift the PPC?
NO!
Why do people trade?
Everyone specializes in the production of goods and services and trades with others. More access to trade means more choices and a higher standard of living.
Per Unit Opportunity Cost
Opportunity Cost/Units Gained
Absolute Advantage
The producer that can produce the most output or requires the least amount of inputs (resources)
Comparative Advantage
The producer with the lowest opportunity cost
Countries should trade if they have a relatively (higher/lower) opportunity cost
lower
Countries should specialize in the good that is...
cheaper for them to produce (the one they have a comparative advantage in)
Calculating Comparative Advantage for Output Questions
OOO = Output: Other goes over
Calculating Comparative Advantage for Input Questions
IOU = Input: Other goes under
Terms of trade
The agreed upon conditions that would benefit both countries in trade. Both countries can benefit from trade if they each have relatively lower opportunity costs.
Note
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